Good morning, and welcome to Sixth Street Specialty Lending Inc.'s second quarter and the June 30th, 2021 earnings conference call. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Sixth Street Specialty Lending Inc.'s filings with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.
Yesterday, after the market closed, the company issued its earnings press release for the second quarter ended June 30th, 2021, and posted a presentation to the investor resources section of its website, www.sixthstreetspecialtylending.com. The presentation should be reviewed in conjunction with the company's Form 10-Q, filed yesterday with the SEC. Sixth Street Specialty Lending Inc.'s earnings release is also available on the company's website under the investor resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of for the second quarter ended June 30th, 2021. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Joshua Easterly, Chief Executive Officer of Sixth Street Specialty Lending Inc.
Thank you. Good morning, everyone, and thank you for joining us. As usual, with me today is my partner and our President, Bo Stanley, and our CFO, Ian Simmonds. For our call today, I will review this quarter's results and pass it over to Bo to discuss this quarter's originations activity and portfolio. Ian will review our quarterly financial results in more detail. I will conclude with final remarks before opening up the call to Q&A. After market close yesterday, we reported second quarter adjusted net investment income per share of $0.46, exceeding our quarterly base dividend per share of $0.41. This corresponds to an annualized return on equity of 11%. Adjusted net income per share for the quarter was $0.88, which corresponds to an annualized return on equity of 21.4%.
Year to date, our annualized return on equity on adjusted net investment income is 12.4%, ahead of our full-year target of 11.5%-12%, and return on equity on an adjusted net income of 22.2%. This quarter's net investment income reflects continued strength in our core earnings power of our portfolio. The difference between this quarter's net investment income and net income was due to significantly net realized and unrealized gains on our investments, which Bo will cover. Since these gains resulted in accrued capital gains incentive fees, we have adjusted this quarter's results to exclude the impact of this non-cash expense, which was approximately $0.08 per share. There are a few reasons to do this. To start, the accrual for capital gains incentive fee is a GAAP requirement in quarters where cumulative gains exceed cumulative losses, less previously paid capital gain incentive fees.
The rationale is that when these gains become realized, they would be subject to capital gains incentive fees. Note, however, that only a portion of our cumulative unrealized gains at quarter end would actually be subject to a capital gains incentive fee if our entire portfolio would be realized in normal course at that June 30th mark. The rest of the cumulative unrealized gains are related to the valuation of our debt investments, inclusive of call protection, which if prepaid, will result in the recognition of fees and investment income and trigger a reversal of previously accrued capital gains incentive fees related to these investments.
At quarter end, we had approximately $0.16 per share of cumulative accrued capital gains incentive fees on our balance sheet. Only $0.04 per share would actually be payable in cash if our entire portfolio would be realized at their quarter end mark in normal course. A reminder that the calculation of accrued capital gains incentive fees that is actually payable to the advisor is done annually at calendar year end. Capital gain incentive fees would only be payable to the extent our cumulative net realized gains exceed our cumulative net realized and unrealized losses on inception to date basis, less any previously paid fees. All cumulative unrealized gains are disregarded for this calculation since the gains must be realized in order for us to be eligible to receive fees.
Therefore, illustratively, if we were at year end today and calculating the capital gain incentive fees payable based on our Q2 financials, none of our cumulative accrued capital gains incentive fees would be actually payable. Given the capital gains incentive fee accrual creates noise around the fundamental earnings power of our business, we've adjusted our results to exclude this line item. Continuing with this quarter's results, gains on investments drove strong net asset value per share growth of 2.7% quarter-over-quarter to 16.85, up $0.44 per share from Q1's pro forma net asset value per share of 16.41. If we were to look at the growth in our net asset value since the onset of COVID through today, which would require adjusting for the impact of special and supplemental dividends, we've grown net asset value per share by 12.2% since year-end 2019.
From a total economic return perspective, which would factor in the benefit of our quarterly based dividends as well, we've generated a return of 26.8% for our shareholders over this time. While we think the challenges of COVID are far from over, we believe our strong results to date demonstrate the robustness of our business model and ability to create value across uncertain market environments. Yesterday, our board approved a base quarterly dividend of $0.41 per share to shareholders of record as of September 15th, payable on October 15th. Our board also declared a supplemental dividend of $0.02 per share based on our Q2 Adjusted Net Investment Income to shareholders of record as of August 31st, payable on September 30th. Pro forma for the impact of the Q2 supplemental dividend, our quarter net asset value per share was $16.83.
Reviewing our first half progress, we continue to generate attractive risk-adjusted returns by focusing on segments of the market where we believe we have the highest value proposition for our portfolio companies, management teams, and sponsors. After experiencing elevated portfolio turnover in 2020 and faced with reinvestment headwinds from falling credit risk premiums in the broader loan market, we were able to grow our portfolio while maintaining stable portfolio yields and portfolio credit metrics, which Bo will cover in more detail. By remaining disciplined to our specialty lending focus and drawing on the breadth and depth of Sixth Street platform, we are able to find opportunities where our deep sector knowledge and structuring capabilities allow us to generate our target levels of returns for our investors. With that, I'll now pass it over to Bo Stanley to discuss our Q2 originations activity and portfolio metrics.
Thanks, Josh. We had a very active quarter supported by a robust deal-making environment. Against an improving macro backdrop, transaction levels were elevated as sellers looked to capitalize on attractive valuation environment, and buyers looked to accelerate growth through strategic acquisition. Meanwhile, sponsors with record levels of dry powder continue to focus on buying and building portfolio companies. With the busy activity levels for the first half of this year, our thematic approach and scale and resource benefits of being part of the $50+ billion Sixth Street platform continued to serve as important competitive advantage. Our thematic playbook allow our team to efficiently focus on transactions where we have the expertise and the capital base to provide financing solutions that few other competitors could replicate.
In addition, the market insights and resources across the Sixth Street platform, which allow us to provide value beyond capital, became an important consideration for our management teams and sponsors looking to successfully navigate today's complex and evolving market dynamics. In addition to the strong originations activity we had in Q2, we also have a strong backlog for the second half of this year, including agent roles on three large financings that total over $1.5 billion in facility size. As you can expect, we are partnering with our affiliated funds and other managers on these transactions, which provides us the flexibility to determine the optimal final hold sizes for TSLX. This quarter, we had $303 million of commitments and $265 million of fundings across seven new investments, and upsizes to eight existing portfolio companies.
As an illustration of the power of the platform, the majority of our new investments were completed in collaboration with funds across the Sixth Street platform. Perhaps reflective of broader market trends, all of our new investments this quarter were financings to support acquisitions or growth, and six of the seven of these were backed by financial sponsors. We continue to execute on our educational technology theme with new first-lien term loan investments in Axonify and Modern Campus. Given that we were one of the first lenders to market on this theme and have significant familiarity with the business model and market dynamics, we're able to provide speed of execution, and a level of deal structure customization that set us apart from our competition.
As for our other new investments this quarter, they all had the hallmarks of our focus on well-managed businesses with mission-critical, deeply embedded tech-enabled solutions, and they were all sourced through our proprietary origination channels. On the repayment front, activity continued to be relatively muted this quarter at $108 million across two full pay downs and one sell down, which partly reflects the more recent vintage of our portfolio as we began the year. This resulted in net funding activity of $157 million for Q2. The two pay downs this quarter were both M&A driven, and the sell down was our small Neiman equity position at a price above our cost basis, as mentioned on our last earnings call in May. During the quarter, a few of our portfolio companies were in the press following certain milestone events, a couple of which I'll touch upon here.
In May, Caris completed a growth equity round at nearly $8 billion post-money valuation led by Sixth Street's Healthcare and Life Sciences team. Since 2018, TSLX has made relatively small investment in the company's capital structure alongside our affiliated funds and received warrants as part of these transactions. Based on the valuation of Caris' latest financing round, the fair value of our junior debt, warrant, and preferred equity positions increased significantly quarter-over-quarter, contributing to this quarter's unrealized gain. Sprinklr, another one of our portfolio companies and a provider of customer experience management solutions, completed its IPO on June 23rd. We made a small investment in Sprinklr's convertible notes alongside affiliated funds last May, and upon completion of the IPO, our notes automatically converted into common equity.
The quarter-end fair value mark of our equity position reflects a discount to the company's June 30th closing share price, given the trading restrictions on our equity security, but still represents a 2.5x Multiple of Money on our capital invested. Driven primarily by the unrealized gains and the debt to equity conversion of certain investments upon milestone events this quarter, our portfolio's equity concentration increased slightly from 4%- 6% on a fair value basis. We continue to be focused on investing at the top of the capital structure, and our portfolio remains predominantly first-lien oriented, with 94% first-lien at quarter end. As Josh alluded to, the credit quality of our portfolio remains robust, with minimal changes in our credit metrics compared to the prior quarter.
The weighted average EBITDA of our core borrowers this quarter was steady at $41 million, and our portfolio's average attachment and detachment points remain stable at 0.4x and 4.2x respectively. The average interest coverage on our core borrowers improved slightly from 3.2x- 3.4x quarter-over-quarter. Our investments on non-accrual status remain minimal at 0.02% of the portfolio at fair value, representing our restructured sub-notes in American Achievement, as discussed on our call in May. Our portfolio's weighted average yield on debt and income producing securities at amortized cost continues to be steady. This quarter's yield was 10.1%, same as the prior quarter. Approximately 10 basis points higher than what it was a year ago. The yield impact on new versus exited investments this quarter was minimal.
The weighted average yield at amortized cost of new investments this quarter was 10.0%, compared to a yield of 9.5% on exited investments. With that, I'd like to turn it over to Ian Simmonds.
Thanks, Bo. Reviewing the headline results. For Q2, we generated Adjusted Net Investment Income per share of $0.46 and adjusted net income per share of $0.88. Quarter-over-quarter, total investments at fair value grew by approximately 8% to $2.6 billion, driven by net funding activity and the positive impact of valuations on the fair value of our portfolio. Total principal debt outstanding at quarter end was $1.3 billion, and net assets were $1.2 billion or $16.85 per share, which is prior to the impact of the supplemental dividend that was declared yesterday. This quarter's average debt to equity ratio increased to 1.07x compared to 0.93x in the prior quarter as a result of net funding activity as well as the payment of our $1.25 per share special dividend in April.
Our debt to equity ratio at June 30 was 1.08x . We continued to have ample liquidity with $1.1 billion of unfunded revolver capacity against $121 million of unfunded portfolio company commitments eligible to be drawn. At quarter end, we remain match funded with 4.1 years of weighted average remaining time to maturity on our debt liabilities against 2.4 years of weighted average remaining life of investments funded by debt. Our next debt maturity is approximately a year away, in August 2022, on $143 million remaining par value of convertible notes. This quarter, the average share price of our stock continued to exceed the adjusted conversion price on these notes. As we've mentioned previously, we have the flexibility under the indenture to settle the aggregate value of these notes in either cash, stock, or a combination thereof.
The triggers for early conversion have not been met, and we will make a determination on the most efficient settlement method when the time comes based on our then balance sheet leverage and investment opportunity set so that we can manage the impact on Net Asset Value per share and Return on Equity. A reminder that per our early adoption of ASU 2020-06 last quarter, the diluted EPS in our financial statements uses the if converted method, which shows the maximum dilution effect of our convertible notes to common stockholders, regardless of how the conversion can actually occur. Moving back to our presentation materials. Slide eight contains this quarter's NAV bridge. Walking through the notable drivers of NAV growth, we added $0.46 per share from adjusted net investment income against our base dividend of $0.41 per share.
As Josh mentioned, there were $0.08 per share of accrued capital gains incentive fees related to this quarter's net realized and unrealized gains. The impact of tightening credit spreads on the valuation of our portfolio had a positive $0.04 per share impact, and there was a positive $0.51 per share impact from other changes, primarily net unrealized gains on investments of $0.43 per share due to portfolio company specific events, which Bo provided some examples of earlier. Moving on to our operating results detail on slide nine. Total investment income for the quarter was $62.8 million, compared to $66.2 million in the prior quarter. Walking through the components of income, interest and dividend income was $59.4 million, up $3.5 million from the prior quarter, primarily as a result of an increase in the average size of our portfolio.
Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns were $2.2 million, compared to $8 million in the prior quarter. Other income was $1.1 million, compared to $2.3 million in the prior quarter. In summary, the slowdown in portfolio turnover this quarter and net portfolio growth allowed us to generate a higher quality of earnings from interest income. For reference, 95% of this quarter's total investment income was generated through interest and dividend income. Compared to 79% across 2020 and 88% across 2019. Net expenses, excluding the impact of a non-cash accrual related to capital gains incentive fees, were $29.7 million, up slightly from $29 million in the prior quarter. This was primarily due to higher interest expense from an increase in our average debt outstanding.
Our weighted average interest rate on debt outstanding decreased slightly quarter-over-quarter by 4 basis points to 2.26% as a result of a funding mix shift to greater usage of our secured revolver. Lastly, on expenses, you'll notice that we applied, for the first time, a fee waiver on base management fees related to this quarter's portion of average gross assets financed with greater than 1x leverage. Above that leverage level, base management fees are reduced to an annualized level of 1%. This is the first time since our stockholders approved the application of a 150% minimum asset coverage ratio in 2018 that we have reached this threshold. For the year-to-date period, we've generated an annualized return on equity on Adjusted Net Investment Income o f 12.4% and on adjusted net income of 22.2%.
Our net income has benefited from both net realized and unrealized gains on investments from company specific events, as well as the positive valuation impact of tightening risk premiums across asset classes. As portfolio repayments moderated in the first half of the year, we've been able to generate greater interest income from investments while increasing our balance sheet leverage to support our ROEs. In the second half, we expect some rebound in portfolio repayment activity, which would drive a more normalized level of activity related fees for our business. Based on where we stand today, we believe we are on track to meet the high end or exceed our previously stated guidance range of $1.82-$1.90 of Adjusted NII per share for full year 2021, which corresponds to a return on equity of 11.5%-12%. With that, I'd like to turn it back to Josh for concluding remarks.
Thank you, Ian. In the first half of the year, the broader market sentiment has been mostly positive given the vaccine rollout, economic reopenings, and the promise of a continued accommodative Fed. Given the health of the consumer and health of financials and the aforementioned accommodative Fed, we remain constructive on the U.S. economy. We do believe there's a myriad of factors, including the impact of the Delta variant, the debate around transitory versus non-transitory inflation that could create periods of volatility. As always, we position our balance sheet funding liquidity such that we stand ready to operate across varying market environments. As 2020 has shown, in periods of uncertainty, we are a proven source of stability of capital for new and existing clients, while being a provider of strong risk-adjusted returns for our investors.
To ensure that Sixth Street Platform continues to be a leading solutions provider and deliver superior results for shareholders and Limited Partners, we are working hard to expand our capabilities. Over the past 1.5 years, Sixth Street has focused on growing our capabilities in healthcare, growth, and energy, among other business verticals, and have grown our team by approximately 80 people, including 30 investment professionals across sectors and disciplines. Today, Sixth Street has more than 320 team members, including over 145 investment professionals operating across nine collaborative investment platforms from nine locations around the world. We believe that the scale and resources of our platform allow our business to be well-positioned and nimble across business cycles and market environments which ultimately benefits the TSLX shareholder. With that, thank you for your time today. Operator, please open up the line for questions.
Thank you. If you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Devin Ryan with JMP Securities.
Okay, great. Good morning, everyone.
Morning, Devin.
First question here. Just given the strong economic backdrop and elevated transaction activity, coupled with your meaningful available liquidity, just curious how you're thinking about leverage here, current leverage 1.08x . Do you see an opportunity to take that higher in the current environment? How should we think about the trajectory there, if there's anything you can share? Thanks.
Yeah. Great. That's a good question, Devin. I think this quarter was a quarter where it showed up in our P&L, very low kind of activity related fees. That being said, I'll get to your question, I think this is our highest quarter on a per share basis by a long shot on interest income. That was primarily driven by us legging into our balance sheet leverage. Put it in perspective, I think on average, true interest income per share has ranged about $0.81. This quarter was $0.89. Activity fees were typically $0.10. We're $0.03 this quarter. That was all driven by financial leverage. I would expect that we continue to leg into our financial leverage.
We're kind of in the low end to lowish to middle of our financial leverage range. I would expect activity level fees and some portfolio turnover in the second half of the year. We're going to work hard to continue to stay in the 1+ range, and given the economic backdrop, I think we'll want to take it up to 1.15x-1.25x in this environment. Hopefully I answered your question, but given the economic backdrop and the activity levels, we'll most definitely continue. We think there's a path to put out capital, but there's going to be more activity in our portfolio, I think, in the second half of the year on the repayment side.
Yep. Okay. No, that's perfect. Thank you. Then just a follow-up, Josh. The competitive environment for capital allocation, how would you compare today versus other periods of your career, what you've seen? Clearly, there's a lot of deal flow right now, and so that's good. How do you think that might evolve if deal flow slows from here?
Yeah. Look, I would frame it this way. I think this is probably one of the most competitive environments we've seen. The space has been gentrified for sure. There's capital flowing to the space, both in a fund format, in the BDC format, and in the gray market for BDCs. Most definitely, this is probably one of the most competitive markets. That being said, from a risk-adjusted return perspective, it's a pretty good environment to put capital out. I would expect default rates to be low going forward. Corporates are in pretty good shape. Although it's competitive, I think overall risk-adjusted returns, given where we are in the economic cycle, which feels like it got reset. We're in the first or second inning. There's some small corner cases, but it feels like we're in the first or second inning.
You feel like default rates and losses given defaults will be pretty high in this environment. I think there continues to be a path to generate strong risk-adjusted returns for shareholders in this environment. Bo, anything to add?
No. The only thing I'd add is that while competition is intense, it's stable. It's been stable the last two quarters, and it doesn't seem to be intensifying. I think the risk-adjusted return, to Josh's point, is compelling given the economic backdrop.
Okay, great. Very helpful. Thank you, guys. I'll leave it there.
Thank you.
Thanks, Devin.
Our next question comes from the line of Finian O'Shea with Wells Fargo. Your line is open. Please go ahead.
Hi, everyone. Good morning. First question in the line of the competition discussion as well, more toward venture, which it looks like you've been doing a growing cadence of over time. Can you explain the perhaps pros and cons of, let's say, dabbling in venture where that market seems to be typically reserved for the dedicated crowd? Just give us a feel of what the challenge is in getting good quality deals when you're not full-time in that market.
Yeah. Hey, Fin. I appreciate your question. I know this has been a little bit of a theme for you this quarter. I would argue with your premise. We don't do venture debt. When I think about venture and I think on the spectrum of investment strategies, venture is typically investing in companies that have unknown or highly speculative business models that are either pre-revenue or not scaled businesses. We do zero, and I'll say it again, we do zero of that. On occasion, which we've been a leader in and we've done for 20 years, we've financed companies with known business models, known unit economics, very diverse customer base that are growing, that are reinvesting in their business.
I would juxtapose that against the venture debt model where there is an unknown business model, a large Total Addressable Market, but unknown business model, unknown unit economics, or if it's post-revenue, there's highly concentrated revenue. We do zero of what you would think of or what the market would think of venture debt. I don't know, Bo or Fishy, do you have anything to add there?
I was just going to reiterate that the late-stage growth market that we play in, which is characterized with companies that have business models that you can underwrite, downside protection, secondary forms of repayment. We've been doing that for 20+ years. Is that theme expanding over time as you're seeing the digitization of the economy and more businesses?
Fall into that late-stage market. Yes, I think that is a fair statement. We've never done venture and the late-stage growth lending, something we've been doing for 20+ years.
Yeah. Even the earlier stage recurring revenue deals we do are tied directly to very high gross margin recurring revenues that throw off cash flow at the margin line of the reinvesting of those cash flows.
These are scaled businesses with revenue, no customer concentration. I would argue the premise now. There might be, in the case of Passport, which is a company that has went from a venture debt provider to a company that has now grown up and has real diversified contracts with municipalities, and they're in the payments business, and for municipalities and parking lot owners, that has transitioned as a credit and as a business model. That's how I'd frame it for you.
Yep. That's very helpful. Then, I guess this is sort of a related question on I think, Ian, you mentioned there's an impact of yields coming down from the competition and such. There's obviously not a large pool of rescue or specialty oriented deals right now. Do you have any strategy to say, increase your equity co-invest? Anything to help sustain just the baseline yields you've been getting? I know you'll get some pick up, you said, from normalized activity. If this environment is protracted, what do you think on that matter?
I'll hand it over to Ian. I just want to, again, frame it up a little bit, which is when you look at our yields, if you look at June 30th, 2020, our yields at amortized costs are up 10 basis points year-over-year. I'm not sure we said anywhere that yields are coming down. Just to frame it, I think our Q2 2021 yields on new investments were basically at our average yield. I think that exceeded loans slightly that paid off. I think, again, a little bit of maybe this is a theme in the space, we haven't really seen yield compression in our book. We actually picked up net interest margin when LIBOR went from whatever, 2.5% down to 20 basis points.
We picked up net interest margin. Yields have been flat to stable to slightly increasing actually year-over-year. Yields on new investments equal yields on the total book. I think that's a little bit of the benefit of being small, nimble, having the benefit of the Sixth Street platform, having 150 people getting up and thinking about among other things, that direct lending and how to solve an issuer's problem and being nimble across sectors, to a lesser extent geographies. Again, I think the premise is maybe something that's thematically happening in the space. I don't think it's happening to Sixth Street Specialty Lending. Ian, do you have anything to add?
No. Was the second part of your question, Fin, also getting to whether we're seeing more opportunity on equity co-investments? Is that where you're going with that?
Yes, your plans to engage in it as well, I suppose.
We've always been opportunistic about our equity co-investments program. I think over time, we've invested, just to put this in perspective, we've invested about. I'll give you the math. We've invested about $160 million of equity over time. We're currently at 1.7x MOM. I guess that will grow because we have a whole bunch of stuff in the book still. It's been a decent source of returns. I think the average return on fully realized has been in the 40% range. We'll continue to take our shots. I would say that it's very specific. Our equity co-investments program is not asking for equity co-investments in every deal. If it fits into a sector and we have a deep fundamental view of the business and think the prospects are good and the valuation is good, we'll ask for it.
It's more rifle than a shotgun, it's more, I would say, actively managed versus kind of a passive strategy of equity co-investments and taking kind of private equity returns across the cycle. We're pretty specific and thoughtful what we do given the capabilities of the platform.
Got it. Thanks so much.
Thanks, Fin.
Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open. Please go ahead.
Hi, guys. A follow-up to Devin's question. You gave kind of an indication that you may be able to get towards the higher end of your leverage range by year end, maybe. If that path kind of plays out, and there's a lot of variables understood, would that change your bias on what to do with the convert in terms of how much cash, how much debt, how much equity as we got into to next year? I mean, is the convert strategy a function of where leverage ends up at the end of the year? Is that a complete way to put it?
Robert, you're dead on. First of all, I just want to be clear. I think we have given the convert and our ability to settle that in all equity, we are most definitely willing. I'm not sure we'll be able to, willing to run quote, unquote, "harder on debt to equity," and that will give us flexibility, and that is most definitely a consideration in the convert. I think that there's going to be the market environment and as one consideration, which we're very constructive on the U.S. economy, which allows you to lean into your financial leverage a little bit more in that we have effectively can settle the convert with equity, allows us flexibility as well, and that's most definitely a consideration.
Got it. Thank you. One more if I can. You mentioned, Josh, in the prepared remarks, I think adding expertise, I think more at the parent, the manager, obviously, [crosstalk] i n energy. Obviously, energy is everything from oil and gas, E&P to solar panels. Could you give us two parts, one, where you're adding the expertise, but more to the point, should we expect energy exposure to go up at the BDC? If so, could you maybe narrow down what kind of energy verticals you find attractive?
Yeah. It's a great question. We've had expertise both on what I would call infrastructure and distributed energy. Solar, wind, et cetera, on the platform. People don't know this, I think we're one of the largest owners of solar in some of our private funds. Have also made investments in wind, et cetera. Then, typically on traditional, we've been really everywhere from far upstream to midstream. We've done stuff and made investments historically. I think it's wide open. We haven't really seen a ton of opportunities, I would say, in the alt energy space for lending. Maybe that changes, but we most definitely have the expertise, and we've added to that expertise. We have been relatively active in the non-alt space.
For example, we bought a group of, this is public, we bought a group of Reserve-Based Lending loans with a partner that was exiting the business. We have a ESG framework and committed to that ESG framework. I would expect us to be active across the complex, and be opportunistic in that. I think the max exposure was in our energy in the BDC was about 10%. Most of that was in the form of reserve-based lending on hedged proven collateral. I'm not sure we ever get back up to 10%, but we most definitely, when we see opportunities, we're willing to add risk there and be opportunistic. It has to fit into the portfolio construction. It has to be assets we like that are low on the cost curve, where there's not development risk and where they're hedging the commodity price.
We've done a actually a pretty good job, I think, over time, in that space. We have positive P&L. Mississippi was the one mistake, and it was I would say relatively small. Across the investments, we've done a pretty good job and so we'll still be active in it.
Got it. Thank you.
Thank you. Our next question comes from the line of Kenneth Lee with RBC Capital Markets. Your line is open. Please go ahead.
Hi. Thanks for taking my question. Just one on the Sixth Street platform. On a broader level, wondering if you could expand upon your expectations for the platform's potential contribution to originations over the near term. Thanks.
Yeah. We've touched on this a couple of times, but look, sorry. Is the question the contribution of originations to the platform? Is it just where we're adding expertise? Sorry.
Just the first part, just the contribution to potential originations and any advantage.
I don't know if we track it specifically because we kind of go at it as a one team mentality. I would say it ebbs and flows. For example, just to call, technically the healthcare team doesn't sit inside the direct lending platform, but my guess is like 50% of their activities are direct lending related. They really own all of our activities in biotech land. For example, in that space, I think we've invested a couple hundred million dollars, if not more, maybe a half a billion dollars, a half a yard. Given the culture of the platform, which is really, 145- 150 investment professionals getting up every day and thinking about how to be a solution provider for our clients and protect our investors' capital.
I don't think we track it, but it's ebbed and flowed, and the one thing that pops out to me is on the healthcare, which technically sits not within the direct lending team, but has contributed a decent amount to the success for Senior Loan Fund shareholders.
Got you. Very helpful. Just one follow-up, if I may, and this is in related to the previous question about equity co-investments. Wondering if you could just refine your comments. Would it be fair to say that the philosophy around equity co-investment is more around potential upside, versus mitigating potential losses over the cycle? Thanks.
Yeah, look. If the question is our equity co-investment program effectively the way to mitigate credit losses over the cycle versus. The answer is no, in the sense that we're trying to If you look at historically, and obviously you see this with the accrued capital gains fee. We basically have had positive net gains across the books and haven't really experienced massive credits, any really significant credit losses over a long period of time. I think there's the one in Mississippi, but it's been offset by a whole bunch of other stuff.
For us, I would say it's a more offensive strategy, where companies, and where we can partner with people, where we have the expertise to make an educated investment decision, and complete an educated underwriting versus taking a portfolio approach, and trying to offset getting long private capital/private equity beta to offset losses in the credit book. That is not our approach. Our approach is be specific, be a good partner, have a thesis, be able to underwrite and be offensive when we think there's an opportunity based on a sector or company, a management team, and a valuation we like. Bo, anything to add there?
No. I think that's pretty succinct.
Great. That's very helpful. Thank you.
Thank you. Our next question comes from the line of Ryan Lynch with KBW. Your line is open. Please go ahead.
Good morning. Thanks for taking my questions. You guys have always been a big investor into the software space. It feels like over the last several years and really the last several quarters, kind of post-COVID, it feels like everybody, all the direct lenders, are really piling into the software space as that sector performed fantastic overall during COVID. I'm just wondering, as we sit here today and as you guys evaluate new opportunities, what are the biggest risks that you all see today in the software lending space? Is it elevated multiples? Is it riskier markets, technology risk? Really how are you guys navigating that sector, given the amount of capital flowing into it and given the focus you guys have had in the past as part of your portfolio?
Yeah. It's a good question. I'll start and I'll turn it over to Bo. First of all, I think that most definitely there's a greater focus on the software space. That being said, there's a larger universe as well. Software over the last 10 years, to quote somebody smarter than all of us, or at least me, it's kind of eating the world. The base, the digitization or the where software is in our life in both companies and consumers is very large. The opportunity set has grown along with the capital it's looking at. I'm not deeply concerned in the sense that the opportunity set has stayed the same and got smaller and there's a whole bunch of more eyeballs on it. They kind of had a step function together.
I just want to level set there. That being said, we do think we have a unique lens and expertise and can bring the Sixth Street platform to think about not only end markets, but technology, any technology risk, secular trends in technology. We have a framework we like where we're always thinking about, we're focused on companies that are highly embedded, that are super capital efficient. We have a framework on how to determine how capital efficient they are that's been around for 20 years. We've adjusted it. Bo, I don't know if you have anything to add.
Look, the one thing I'd add is we don't think of software as an industry. It's ubiquitous. We get very nuanced within technology itself and have sub-themes that we focus on. I think part of your question was, with everybody piling into this sector, is there concerns about certain business models, et cetera? I think that's right. I think all business models within software are not created equally. All businesses aren't created equally, and you have to be very nuanced in your underwrite. I think the 20 years of pattern recognition that we have along the sector and seeing it evolve has allowed us to get very nuanced and to attack sub-sectors where we think return on invested capital is going to remain strong and the durability of those business models remains strong. That's how we combat it. We're very nuanced.
We're very thematic-focused, and continue to see very interesting opportunities in the sector. Without a doubt, is it more crowded? For sure. I do think there are folks that are being indiscriminate on how they look at businesses.
Yeah. To put a fine point on the indiscriminate. Look, not every dollar of quote unquote "recurring revenue" is created equal. Not every dollar of marketing spend is as efficient. Depending on customer life, gross margin, how embedded, do they control the customer? How stable are the end markets? We continue to be very discriminating as the investments we make in the space, and then we always made same underwriting.
That's really helpful color. Totally understand. Broad brushes, not every software deal is created equal. The other question that I had was, obviously the direct lending space, the borrowers have been growing significantly over the last several years. I'm just curious, on slide number six, you guys show the average loan commitment that you guys are making. Over the last several quarters, it's in the $30 million-$40 million commitment range at TSLX. I'm just curious, what would you say is the average commitment if you guys are holding $30 million-$40 million at TSLX? What is the average commitment that you guys are making across the Sixth Street platform, and where would you guys feel on a max level, feel comfortable committing?
Today you're seeing multi-billion dollar direct lending deals that are clubbed up, but still, I'm just trying to get a sense of where you guys could sit and play on the upper end in the direct lending markets today, given the growth of your platform over the last several years.
Yeah. You pointed out, and I appreciate it. I would not conflate what TSLX holds side with our ability to scale our capital. Being part of Sixth Street allows us, and the exemptive order allows us to move upmarket. I think Bo mentioned in the prepared remarks, there's three deals where agents on that total over $1.5 billion of capital. I think those range from $300 million [crosstalk] - $950 million.
We most definitely will pick our spots upmarket in kind of the Sixth Street way, which is where we can move fast and be a value partner to the sponsor or the issuer. We'll come back to you on the exact commitment sizes across the platform and how those changed over time. I would say my intuition is that they've got bigger, although we've continued to keep portfolio sizes pretty granular in TSLX so that we can continue to where our shareholders can get the value of some diversification, because we're not always going to be right. I don't know if that's helpful, but if you look at the back half pipeline, we're an agent on a $900 million or $800 million deal.
We're an agent on a couple $350 million deals, and so we're continuing to move upmarket where our capital can be value add. Again, we are where BDCs generally sit on the cost curve. You have to understand you're raising the cost curve and your cost of capital to make sure you're providing value, finding that place where there's overlap, where you're providing value to your clients and value to your shareholders. You can't just be a substitute to the high-yield market and leveraged loan market and have fees that are 4x-6x higher. Just doesn't work as an enduring business model.
Okay. Understood, though. That's helpful. Appreciate the time this morning.
Thanks, Ryan.
Thank you. Our next question comes from the line of Miss Melissa Wedel with JP Morgan. Your line is open. Please go ahead.
I think, good morning. I think most of them have been asked, but I [audio ditortion].
Sorry, Melissa, we've lost you.
Oh, sorry.
You're breaking up.
Pop back in.
Yeah, Melissa, we can't hear you. Do you want to try to get into a better zone? Obviously, we want everybody to get the benefit of your question and to be able to answer your question, but we can't hear you at the moment.
Our next question is going to be from the line of Mickey Schleien with Ladenburg. Your line is open. Please go ahead.
Good morning, everyone. Hope you're well. Josh, you have been historically very successful using a thematic investment thesis in your portfolio management. If we look back at 2020 and this year, I'd like to ask, how has the pandemic affected the themes that you're pursuing, if there's been any change?
Yeah. Look, I would say Thank you, Mickey. By the way, I appreciate the attribution to Josh, it's really the platform and the people around the platform. I think, most definitely themes come in and out of vogue. I would say one theme that's coming out of vogue for us is retail on the margin. Kind of the pandemic washed out. By the way, generally, I think capitalism does a lot of the heavy lifting for society. Typically, you have an economic downturn. It gets rid of all the zombie companies that are high on the cost curve that are inefficient users of resources. I'm not sure the pandemic did that except for the retail. You surely had that done in retail, and that was happening before with Amazon, Direct-to-Co nsumer.
People who didn't have a real omnichannel model were going away. That being said, I think the pandemic accelerated that cleansing of retail. Now, the retail that's left overlaid with a really, really healthy consumer is, I would say, is in really good shape and probably, peak-ish earnings across the sector are going to be peak-ish earnings across the sector. I think we're probably less bullish about, in the short term, given that the health of the U.S. consumer, there's, I think $1.7 trillion of excess savings across the U.S. economy, that the retail that's left has a better value proposition. I think that's surely one thing that's come out of vogue for us. Payments continue to be in vogue for us, and so Passport fits into the software kind of where it meets payment ecosystem. But it constantly changes.
Some parts of healthcare, we think are really interesting, and others not. We continue. This is the thing as a platform we continue to always talk about, and spend our time as a group and the partners talking about. Bo or Fish, anything to add?
No. What I would add is, for direct lending, there's generally 15- 20 themes we're actively pursuing at any one time that's constantly rotating. We spend a lot of time. We have weekly meetings talking about thematic research and testing ideas and pressure testing certain themes, and that's constantly rotating. That's been a practice since we started. We'll continue to do that. In periods of dislocation at the beginning or ends of cycles, we see that rotation generally speed up. To your point, I think we've had a pretty healthy rotation of the themes that we're pursuing post-COVID. That will continue as long as we're here managing money.
I'd say we also look at on software recurring revenue. The sub-themes would be the end markets that they're related to. We spend a lot of time thinking about that. As we said before, not every recurring revenue deal or software deal is the same. Those that focus on specific sectors themselves, we have to look at that as effectively a subsector of our theme.
Josh, on the back of that, I haven't done the math, but if you were to look at the Internal Rate of Return on some of your distressed retail deals. They were pretty exceptional if I'm not mistaken. Is there a new theme that can sort of replace that? Or when you and the board think about sort of target ROEs, are you considering a lower ROE target going forward if there's no theme that can replace that distressed retail opportunity?
Yeah. Thanks. Obviously that's been a theme for us. The other themes will pop up. We've been pretty clear. Portfolio yields have remained pretty constant. I think our ROEs are going to be at the high end of our, when you think about the exceptional value proposition for TSLX shareholder, I think what we said today was our average ROE has been about, over time, I think about 12%. We think it's going to be 12%+ this year on a net investment income basis. Obviously, there's been a huge uplift on a net income basis in a rate environment that's 200 basis points less than what we've lived in. We think on a risk-adjusted basis, we're actually doing more for our shareholders. I don't think ROE targets have moved down. I think we're doing more for our shareholders. That's a little bit of financial leverage.
That's us being able to hold portfolio yields. I think this has been and will continue to be one of our best years, given the interest rate environment to provide value for our shareholders. You see that across not only the net investment income line, but the net income line and how capital efficient we are.
I appreciate that, Josh. Just one sort of more housekeeping sort of question. I realize it's a small portion of the portfolio, but could you review why you've invested in Collateralized Loan Obligation debt instead of CLO equity, given that CLO equity estimated yields are so much higher and their cash flows have been really exceptional pretty much since the second half of last year?
Look, I would say, first of all, CLO equity, we invested in the CLO debt, I think in the middle of COVID, where as you know, we don't try to lose capital, where there was a decent amount of uncertainty on defaults and recoveries, and it wasn't clear that CLO equity was going to make it to the other side. We haven't added any new CLO debt positions in the book. I generally think that to your point, that CLO equity has a decent value proposition at the moment although it's highly volatile. I would say, as you know, and you've lived through, and we've seen across the space, there is a significant difference between cash-on-cash returns and ultimate IRRs.
Current cash-on-cash returns in CLO land is not only net interest margin, but it's not only a return on capital, but a return of capital when you look at an entire kind of lifespan of a CLO investment. I wouldn't disagree that it's worked. At the time where we made investments into the structured credit land and we haven't made it since COVID, it was in a very different time with a whole bunch of uncertainty around defaults and losses. Given the nature of CLO equity is massively levered, we didn't think it was appropriate for the BDC.
Okay, I understand. That's it for me this morning. I appreciate your time. Thank you.
Great.
Thank you. I'm showing no further questions at this time, I would like to turn the conference back over to Joshua Easterly for any further remarks.
Great. Thank you so much for people's interest and time. We look forward to chatting in the fall. I hope people have an easy and healthy rest of summer and enjoy your Labor Day. Thanks.
This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.